RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the RSWM Limited Q3 and 9 Months FY '24 Earnings Conference Call. We have with us today from the management, Mr. Avinash Bhargava, Chief Financial Officer; and Mr. Surender Gupta, VP, Legal and Company Secretary. [Operator Instructions] Before we proceed with this call, I would like to take an opportunity to remind everyone about the disclaimer related to this conference. Today's discussion may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in conjunction with the risk that our business faces that could cause our future results, performance or achievements to differ significantly from what may be expressed or implied by such forward-looking statements. I now hand the conference over to Mr. Avinash Bhargava for opening remarks. Thank you, and over to you, sir.

Thank you so much. Good evening, and welcome to all the participants to this quarter 3 and 9 months financial year '24 earnings call of the company. I hope all of you had a chance to look at our investor presentation that is uploaded on the company's website as well as the stock exchange. I will elaborate on the present industry and business scenario and give brief financial highlights for the quarter and 9 months ended on 31st December '23. About global and domestic market scenario, the export market is facing challenges due to a decrease in demand, economic difficulties in countries like Turkey and Egypt have made matters worse. Turkey is dealing with the devalued currency, while Egypt struggles with shortage of U.S. dollars. In contrast, the U.S. economy is strong, with inflation rates under control. Yarn prices in Bangladesh are showing signs of recovery, reflecting a trend observed in other countries. Although prices have increased by $0.05 a kg in the past 4 weeks, they are still below their level from 3 months ago. Similarly, blended yarn prices have also risen by $0.05 a kg. Despite securing an order for approximately 267 containers in January, selective order bookings is being practiced avoiding significant losses. The expectation is for a gradual increase in export volumes over the next 2 to 3 months. However, there are some positive movements in the 100% cotton yarn in regions like Bangladesh, while the price points for PC yarns remain unsustainable due to competitively priced oversupply. Exports as facing disruptions due to increased sea freight caused by Red Sea crisis. This has led to an irregular vessel schedule and extended sailing times, introducing uncertainties into export operations. Additionally, exporting commodity yarns presents its challenge as our pricing struggles to compete with counterpart from other origins such as Indonesia and Vietnam. Furthermore, the Red Sea crisis has resulted in a long-term increase in polyester stock prices. Prices have risen for second consecutive week, climbing by 2%. These challenges in the export market underscore the need for strategic planning and adaptability to navigate the current landscape effectively. In the local market, there is not much growth and prices keep going down. This is making some yarn makers change what they make a plain white yarn, which they can sell for cheaper prices. Melange yarns are facing challenges due to shift in buyer preferences, resulting in a significant decrease in their overall share within the value chain. However, there has been a notable increase in the dyed yarn business in recent months, attributed to improvements in the Home Textile business over the preceding 2 quarters. Despite this positive trend, the collection of payments remains problematic due to sluggish business growth. Furthermore, the sales of yarn have been impacted by recent imports of knitted fabric from China. On a brighter note, there has been an uptick in orders from domestic brands during the third quarter. While orders for solid dyed yarn remains steady, demand for melange yarn is comparatively low. To make retail operations more viable, many international brands have opted for melange's garment style. Despite these challenges, there has been slight growth observed in the Woven and Home Textile business over the past 2 quarters. After enduring several challenges in the quarter, the textile and cotton yarn industry has shown signs of improvement in the recent quarter, particularly in export demand and various end user segments. Regarding raw materials, the notable positive developments lies in the stability of cotton prices, which have remained slightly below international levels, alongside reasonable availability. Additionally, Spinning & Weaving utilization has been close to normal levels, with the Woven apparel segment experiencing enhancement due to increased offtake by retail brands. This has led to margin improvement and enhanced cost competitiveness for the industry despite ongoing global challenges, keeping margins below typical levels. In summary, while challenges persist, the textile and cotton yarn industry are on the trajectory of recovery, exhibiting resilience and optimism. Collective efforts from stakeholders, including the government, along with strategic initiatives, position the industry well for sustained growth, shifting focus to the company's performance, spinning and woven fabrics utilization has near optimal. With all capital expenditures completed with the specified time frame, knitted fabric utilization has improved, resulting in quarter-on-quarter volume growth. This growth is primarily attributed to higher selling prices, driven by lower raw material costs. Export growth has been noted, thanks to stable raw material prices over the past few months, increased capacity utilization and favorable cotton prices have improved margin in the current quarter. However, margin is still far below normal levels due to pricing pressures. Ginni's proposed acquisition, RSWM Limited, strategic acquisition plan is expected to deliver significant advantage across multiple areas. Firstly, the company synergies from acquisitions are predicted to improve EBITDA and drive earnings growth, enhancing RSWM's financial stability and boosting its earnings per share. Moreover, the acquisition is set to greatly widen our customer base, positioning it as key players in the spinning and fabric industry. This expansion involves adding considerable production capacity, including around 80,000 ring spindles, 720 rotors and significant daily outputs of knitted fabric and processing. Additionally, RSWM's dedication to environmental sustainability is highlighted by inclusion of 5.4 megawatt rooftop and round-mounted solar setups in the acquisition at Chhata. Furthermore, the acquisition presents a notable cost advantage as the acquired model spinning assets come at a significantly lower cost compared to replacement expenses by leveraging its scale, innovation depth and expertise. We aim to harness operational efficiencies and realize significant cost savings. This acquisition reinforces our leadership position in the industry, characterized by impressive turnover, employee strength, plant capacity and overall market presence. Overall, RSWM's strategic decision to acquire the undertaking of Ginni Filaments Limited signified a crucial milestone in its pursuit of sustainable growth and market dominance, affirming its commitment to nurturing a resilient global ecosystem for long-term competitiveness. Looking ahead, our strategic focus for the upcoming quarters revolves around optimizing the product mix and increased production capacities while refining value addition. With completed capital expenditures, we are well prepared to meet anticipated demand expected in the coming quarters. This concludes my overview, and I now welcome any questions from the audience. About financial overview, revenue for the current quarter was INR 977 crores against INR 855 crores on year-on-year basis. Revenue increased by 14.3%. EBITDA for the quarter was INR 22 crores as compared to INR 28 crores in quarter 3 of financial year '23. EBITDA margins for the quarter is 2.3% as against Q3 financial year '23 margins of 3.3%. Profit after tax for the quarter is loss of INR 32 crores as against INR 14 crores loss in Q3 financial year '23. Cumulative revenue for 9 months of the current year INR 2,886 crores against last year's same period revenue of INR 2,833 crores. It is a little higher than last year. Cumulative EBITDA for 9 months is INR 77 crores against INR 251 crores in the same period last year. Cumulative PAT for 9 months is loss of INR 65 crores as against last year's same period PAT of INR 67 crores profit. Now I welcome -- if any question is there from audiences, they can come across. Thank you so much.

[Operator Instructions] We have our first question from the line of Prerna Jhunjhunwala from Elara Capital.

Sir, I had this question on acquisition that you have done. What would be the top line in EBITDA of this acquired unit and PAT? That will be the first question for this.

You know that if we will discuss about PAT, it will be irrelevant. If PAT would have been there, [indiscernible] from [ Jaipurias ]. As far as the top line is concerned, it is around INR 600 crores.

Okay. And is the unit making profit, EBITDA level?

Yes, at EBITDA level, they are making profit around 6% to 7%.

6% to 7%. Okay. So could you just help us understand how this unit will help RSWM to improve its overall performance? And like what kind of synergies do you expect from this acquisition is something that I would like to understand.

You know that RSWM was planning for expansion in Jammu and Kashmir and MP like states. But we restricted ourselves for a new expansion in the effort for this kind of acquisition like acquisition of spinning, knitting and processing, undertaking of Ginni Filaments Limited at Chhata. And it will add around 80,000 ring spindles, 720 rotors and 12 tons per day of knitted fabric. [ 13 ] tons per day of processing. They have dyed yarns also. And it's a running unit. It is running well.

And is it running at full utilization, sir?

Yes, they are almost on full utilization of these machines.

Okay. Okay. And sir, how is the product -- is the product mix different than what we are already producing in-house or is it complementing the same product profile in enhancing our capacity?

No. It's the same product, which we are producing. Like you have told about how we will -- how it will help our top line or bottom line. We have the expertise in RSWM for spinning and knitting as well.

Okay. And sir, is our unit operating at full utilization? I observed that fabric is making profits for you at EBIT level. So could you just help us understand whether it is denim fabric or knit fabric or both? And how are these fabric units doing and expected to do going forward?

Going forward, this Chhata unit of Ginni Filaments Limited, spinning unit of Ginni Filaments Limited at Chhata is producing yarn, cotton yarn basically. And they are producing knitted fabric also.

So I'm asking for RSWM unit in the results, the fabric unit is making profit of around INR 2 crores at EBIT level. So I was trying to understand is the profits coming from denim business? How is that business doing so that we understand how is the fabric business performing?

This profit is coming from denim business.

Okay. And sir, denim, we are utilizing in full, the capacity?

Denim capacity utilization, as of now, is around 96% in RSWM.

That's fantastic.

And you will appreciate that no other company like Arvind, [indiscernible] and Ginni are able to achieve more than 70%.

Yes, that's why I said. I mean it's a very good utilization level. And sir, what is the utilization level for knit fabrics?

Knit fabrics, we are able to utilize around 65% to 70% capacity only.

Okay. This is also good in current scenario.

And secondly, you will appreciate that this business is new for us. And we are just building up our strength into knitting business in RSWM. Ginni Filaments Limited's Chhata unit will help us in getting the customer base, their technical expertise. This way we will double -- RSWM will double its capacity in knitting.

Yes, I understood that from -- okay. Okay. And sir, what is your experience in knit fabric? Like do you want to go ahead with a higher capacity in knit even after this acquisition? Or you first want to consolidate this now and then think about the next?

This is the time for consolidation, Prerna. As of now we don't have any planning of expanding in knitting. So first, we will consolidate this. We will use the capacity available at Chhata knitting unit of Ginni Filaments Limited. Putting together the capacity will be around 26 metric ton a day.

Okay. Okay. Sir, last question on the yarn business. There has been challenges in the yarn business, but what is causing this acute weakness in the yarn business performance? Why is this business at such low -- at such high losses when -- I mean we have been strengthening our efficiency levels and everything. So what is lacking in the business as a whole, I mean, not RSWM also because today the other competitor has also reported numbers, they're also in losses. So what is happening in this blended yarn business, which is refraining us from reporting very good numbers?

You know that international market is not responding. And in domestic market, also QCO restrictions in case of fiber is preventing the growth of yarn business in India -- blended yarn business in India. The situation with all players, more or less, is same.

Yes, I can see that. And sir, also the QCO, isn't it beneficial for yarn manufacturers also because QCO has been applied for polyester yarn also? Or is it only for filament yarn?

No, QCO is applied for fibers.

Is it not applied for yarn?

Please understand that QCO is applied for fiber. When we are able to procure that fiber from international market. There is no restriction of importing of fabric made from fiber from that fiber in China. China is exporting or selling the product to India, which is being used in this Knitting & Weaving sector in Ludhiana, Bhiwandi, these kind of markets.

Okay. So now higher amount of fabric is being imported. Okay.

So the restriction should be on fiber and yarn as well. The restriction should be on fabric or yarn being exported from China. This will be a problem.

Understood. So higher imports is a bigger problem now?

Yes. We have taken up with the government through trade associations for this QCO restrictions. Let's see when it will be resolved.

[Operator Instructions] We have our next question from the line of [ Tanuj Patel ] from JM Financials.

Seeing this quarter results, how can we improve company results in the upcoming quarter?

This is a futuristic question. We cannot answer right away. We are striving for best utilization of machines, minimizing the cost.

Okay. Then I want to ask what steps did we take to decrease expenses?

These kind of efforts we are putting in.

Okay. I want to ask, what steps we can take to decrease the expenses in the recent quarter? What steps have been taken?

Actually, our top management team reviews the various overheads, raw material costs, transportation costs on weekly basis. And that is the only way in this tough time.

[Operator Instructions] We have our next question from the line of Saket Kapoor from Kapoor & Company.

Sir, firstly, you very well articulated to the fact that had this not been tough time, Ginni Filaments would not have sold its mother unit. So that is very well taken that these are good cyclical downturns wherein we are getting good assets at very good reasonable valuation. So taking that into account, sir, what kind of refurbishment would be needed? I think so people are of the opinion that the plant, which we have acquired, are having old machineries and it may require further investment to the tune of INR 100 crores or INR 150 crores to get optimum result. Do you buy that logic or, sir, if you could correct me here?

Partially yes, partially no, because feedback of the market that entire machine is very old is not correct. Some of the machines and some of the expansions were took place in 2006 and 2009 also. And these machines are as good as the machines available with the RSWM. The productivity of these machines is very good. And yes, some of the machines require this refurbishing or modernization CapEx. Let's see, whenever the time will suit, we will modernize these machines in future. As far as productivity of these machines, production from these machines are concerned, the machines are running well. Though they are old. Though they are -- though these machines are even 30 years old.

Right, right. And sir, taking into account the net debt also on the book, what is -- what has been the total cost to us in terms of the -- and also I think that we will be taking over the entire receivable and other heads also? Or how will this transaction work out? I think the 31st March will be the date by which -- the asset will be acquired on that date, the total net cost if you could explain?

The total deal is of INR 160 crores, which includes land, plant and machinery, building plus net current assets.

Okay. And sir, if you could give the value of the current assets also and the loan, which we will be taking over?

There would be a term loan kind of thing. They have about INR 108 crore loan, which will be repaid by RSWM. So we will take over these loans. We will take over these loans. And slump sale, these loans will be transferred to RSWM.

Right. Sir, when we look at the rating agencies very recently, as on 6th February itself, they have downgraded and they've revised -- sorry, they've revised the outlook on RSWM to negative. So sir, what would be the impact on the cost of borrowing? Firstly, if you could give me the net debt numbers and the cost of borrowing? And how will this negative outlook is going to affect our cost of funds?

Saket, this is a very good question from your side because this rating has been done very recently. [indiscernible] negative from stable. And we hope that there will not be much impact on our pricing of term loan as well as working capital. It will not have a very big impact on RSWM's cost of finance. I kind of appreciate that in this tough time also and when the company is making loss, we are able to maintain this [indiscernible]. And this is because of inherent strength of RSWM.

Right. Sir, what is the cost of fund currently, our borrowing cost?

My borrowing cost is roughly about 8.5% in total. And it is before subventions. And after subvention, it is a little lower than that.

Sir, when we look at your power and fuel costs, that has -- Q-on-Q, that has gone down, I think, to commensurate with the drop in revenue. But I think so our utilization levels are similar Q-on-Q, sir, if we take the September '23 and the December '23 utilization level in percentage terms, are we having the same percentage and the same mix? And what explains them this power and fuel savings and continuity [Foreign Language].

Before -- if you talk the situation before 6 months, it was very difficult in Rajasthan because the power cuts were so much. But since last 4 months, power situation in Rajasthan is very good. The additional cost of power just because of use of coal or use of thermal power capacity, that increased the power cost -- that has increased the power cost at the time in September quarter. But in the December quarter, by and large, it is controlled. In November and December, the power situation in Rajasthan was okay.

Sir, currently, we are totally dependent on the grid, and we are not generating power from our CPP?

From thermal power -- thermal power is not advisable in this time, but we are getting the power from solar power plants, 30 megawatts and windmill, 40 megawatts.

Okay. And sir, what should be the cost per unit then? Currently, the blended cost of power?

Blended cost of power is around INR 6.75 per unit.

And what was it, sir, for the September quarter? Just to understand the impact.

It was around INR 8, INR 8.5 per unit.

Okay. So this INR 5 crores, INR 6 crores savings will continue now since the power situation has improved?

Yes, you can assure your side.

Right, sir. But on the finance cost, that has gone up by INR 6 crores, INR 7 crores quarterly. From INR 18 crores to INR 24 crores.

Yes. And I will tell you that how it has gone up. Earlier, the -- our Kapaas unit, which is of around 51,000 spindles unit at Lodha, knitting unit and all, the interest was being capitalized. And from December quarter onwards, there could be the interest cost of that expansion of 51,000 spindles. That's why it has been increased.

The new capacity that got commercialized.

Yes, it has been -- since it has been commercialized, it cannot be [ capitalized ]. So that interest cost will be there. And as and when it will be repaid, it will be reduced gradually.

Sir, the net debt number, what you mentioned, I missed it, absolute number of net debt on the books?

If we will talk about term loan, it is around INR 650 crores at 31st January 2024.

And working capital?

Working capital is around INR 550 crores to INR 600 crores.

INR 550 crores to INR 600 crores. And sir, this INR 650 crores term loan will -- there will be an addition of another INR 150 crores post March that [Foreign Language]. So for year ending, we will be closer to INR 800 crores in term loan?

See, it will -- no, it will be around -- not INR 800 crores. It will be around, after repayments and all, it will be around INR 740 crores.

Come again, sir. How much?

Sorry. Sorry, INR 740 crores, sorry.

So we have some current maturities as of March to be repaid, and that we will be paying from our cash?

Around INR 50 crores has to be paid against term loan.

And that will be paid from the internal accruals only?

Yes. Internal accruals and non-DP assets. Some of the non-DP assets are there, which are being realized.

Come again, sir, non?

Non-DP assets, like some refunds are due from government, some of the [indiscernible] are there, these are getting realized.

They are non-DP assets. I'm missing the word.

These are non-DP assets on which working capital finance is not...

Correct. So just to -- sir, your voice is again muffled. I think -- I am on a patchy line or sir I cannot understand.

The repayment will be from internal accruals, number one. Number two, we will generate the cash from non-DP assets also. These are at balance sheet on which the bank does not finance. So with our efforts, we will get it.

Sir, as we look into your employee cost, that as a percentage of sales, are these structurally going to be at these elevated levels? Sir, I think so more than 10%, 11% is our employee cost. Or with now...

You know that this cost cannot be reduced straight away because you have to pay variable pay to the labors and a minimum increment to the staff members also.

Correct, sir. So it is now only subject to the improvement in the realization...

Mr. Saket, may I request you to rejoin the queue? [Operator Instructions] We have our next question from the line of Ashok Shah from LFC Securities.

Sir, so while going through the results and past results, sir, yarn making is day-by-day becoming a costly affair or the nonprofitable affair. But simultaneously, major cost is interest, which we cannot reduce, but at least power cost, which we can reduce. Sir, we are buying power at INR 8.5, a much higher rates in the past, and now it has been reduced.

Not we are, we were. Just...

Now we were, yes. But what is the cost of the power for the wind power and solar power for us?

Putting together the power cost as of now is not more than INR 7.

Yes, that is agreed. But I'm talking about the solar and wind power.

Solar and wind power, you know that these are in open access arrangement. So we can talk only with this average power cost.

Yes, definitely, I agree with you. Day by day, since yarn making is becoming a costly affair due to huge power cost, and we have to reduce the power cost, and that can be done only by the way of fresh investment in solar or the -- solar -- basically solar will be much better nowadays, and also wind power. So as and when we are doing CapEx regularly in yarn business, but simultaneously, our power cost is becoming day-by-day hindrance on the profitability.

Please appreciate that before 6 months, we acquired BG Wind Power Limited at the acquisition cost of INR 5 crores. And the size of this BG Wind is 20 megawatts.

Sir, I agree with you, but when we are already spending INR 400 crores on power. So it's a huge amount, which we are spending. So I think major way to look forward is how to save power cost.

Please don't go that what we had paid. But please appreciate that we acquired the capacity of 20 megawatts. If it would have been -- if you -- if the volume of investment is concerned, it's not like that. We have to acquire the capacity to nurture our production capacity in yarn. So we acquired the capacity of 20 megawatts. And initially, this plant was having some bottlenecks. Now it is working at it's good capacity at good [indiscernible].

Sir, do we have any future plan to reduce our power cost from INR 400 crores to some substantially or at what level we want to bring it down?

You know that this Ginni acquisition has 5.4 megawatts capacity.

Solar or wind?

We are doing some other efforts also, which we will discuss in future. We have some plans, which will be discussed on the appropriate time.

Sir, we have what...

Sorry to interrupt, sir. May I request you to rejoin the queue? We have a next question from the line of [ Disha Patel ] from Lucky Associates.

Sir, my first question is how is the company managing its cash flow during this challenging period?

Actually, the working capital utilization of RSWM even in its tough time, it is around 60% only, number one. Number two, we are liquidating our inventory levels, which has gone up as high as 10,000 metric tons. We are trying to control that inventory level and the realization from debtors. Proper monitoring, credit period is being monitored very closely. Bank limits are being monitored very closely. Inventory levels have been monitored very closely.

Okay, sir. My second question is, sir, what is the company's long-term vision and plan for recovery?

May you please repeat your question?

Yes. What is the company's long-term vision and plan for recovery?

You know that as and when this -- there will be any kind of surge in the market, which we expect that from February onwards, the market should be good. And we are very much hopeful that this '24-'25 will be good for yarn, knitting, denim, all. Fortunately, nowadays, my denim business is doing very good.

We have a next question from the line of Saket Kapoor from Kapoor Co.

Yes. Sir, we have investment in Bhilwara Energy also. I think so they house some hydro assets. So how are we benefiting from our investment in Bhilwara Energy? Do we have any sourcing of power or that is a separate entity altogether?

It's a separate entity, and it's an investment only.

Okay. Okay. So whatever -- on the income post if there is dividend and all that will be accrued, there will be no earnings money, no saving on power cost for the investment in Bhilwara?

There is no connectivity with the power cost as far as this Bhilwara Energy is concerned. It's a group entity, but not supplying the power to RSWM. This is an investment of RSWM.

And taking into account your current scenario, [Foreign Language] we are doing considerably well. And also our utilization levels are good. But other than that, sir, [Foreign Language] post December, January month, [Foreign Language] order booking [Foreign Language] and the likelihood [Foreign Language] as of now.

If you have listened this -- my opening remarks, we have the export, we have the order of approximately 267 containers in January, which are to be supplied in February, March and April also. So you can witness this good order booking in case of export. And as far as domestic is concerned, it is not generating much profit, but doing good. And in this tough time, we can make our efforts only, rest is dependent on market.

Sir, a small point, these 267 containers are valued. How do we value them, sir? And what are the margins that will -- what will translate by...

You know that 267 containers is having different kind of product mix, and I cannot calculate this margins or realization value. I cannot calculate right away. But kindly appreciate that these containers should be of 20 feet or 40 feet, whatever.

20?

20 feet. The container size remains 20 feet or 40 feet. But nowadays, it remains -- usually it remains at 40 feet.

In value terms, sir, can you guide us, sir, what should be the ballpark number?

No, Saket, it will not be right for me to calculate 267 containers into value. Because it requires a lot of working. And I don't have the data of pending orders related to this 267 [indiscernible]. Otherwise, I would have been telling you that what is the value of these containers. Definitely, it should be there in the system. But right now, I don't have that.

No issues, sir, at all. But the business environment has improved post December?

Business environment has improved. Particularly it is indicating for a good market if not in Feb, definitely in March and April.

And sir, out of the total, our revenue, what is our export mix? Total sales [Foreign Language].

In good time, it remains around 35% to 37%. But nowadays, it is around 25%, 27%.

Okay. So for this quarter, it is 25%?

It is not calculated like this, but it...

Sorry to interrupt, sir, we are at time. Due to time constraint, that was the last question for today. On behalf of RSWM Limited, we would like to formally conclude this Q3 and 9 months FY '24 Earnings Conference Call. We sincerely appreciate your participation in this event, and we kindly request that you now disconnect your lines. Thank you for your time and your engagement.

Thank you so much for patience listening and supporting us in this tough time. Thank you so much.